With the new year, another issue is becoming more pressing: the Social Security shortage. The Social Security and Medicare Boards of Trustees confirmed a long-held worry this year when they released a report analyzing the two programs’ current and anticipated financial status, and the picture is bleak.
Given this, it is not surprising that, according to a nationwide survey, 84% of Americans aged 60 to 65 are concerned that their benefits may be reduced. Inflation is another paralyzing concern for this set of studied persons, which is understandable given the impact it has had on their wallets in recent years.
This is exacerbated by the fact that many seniors rely on Social Security benefits in some form or another, as it accounts for a significant portion of their income and is often their sole source of income.
This reliance on help makes studies like the one released this year especially alarming, as they do not offer a positive picture.
The shortfall of Social Security, a sure thing?
Nothing is certain in life, but the current situation of the system is not encouraging. The primary source of revenue for Social Security is payroll taxes, which are supplemented by funds held in the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund to pay out the full extent of the benefits that the program currently provides.
Because payroll taxes will continue to be collected indefinitely, a portion of the program will remain operating. The difficulty is that there are far more beneficiaries entering the program than workers replacing them, particularly at the contribution levels of those leaving the workforce. This is when trust funds come into play.
For years, the Trust Funds have made up the difference between payroll taxes and benefits handed out, but they are also running out of money, and there is no strategy in place to refill them, which means that the program may have to reduce payments if no alternatives are implemented.
According to the report, “The OASI Trust Fund will be able to pay 100 percent of total scheduled payments until 2033, unchanged from the previous year’s estimate. At that point, the fund’s reserves will be spent, and ongoing program income will be adequate to cover 79% of scheduled benefits.
The DI Trust Fund is expected to be able to pay 100% of total scheduled benefits through at least 2098, the final year of this report’s projection period. Last year’s report estimated that the DI Trust Fund will be able to provide scheduled benefits until at least 2097, the report’s forecast period.
If the OASI Trust Fund and DI Trust Fund predictions are combined, the new anticipated fund (named OASDI) will be able to pay 100% of all scheduled payments until 2035, one year later than predicted last year. At that point, the projected fund’s reserves will be spent, and ongoing total fund revenue will be adequate to cover 83% of scheduled payouts.”
These figures explain the panic that many Americans are experiencing, but this is not the first time the program has been threatened. Lawmakers have the authority to amend some of the funding tactics and rules that will ensure the program’s viability for future generations, but no consensus has been achieved as both sides of the political divide appear to be at odds about how to sustain the program.
While waiting for a solution may be enticing, prospective retirees should prioritize their retirement savings by maxing out retirement plans, including catch-up contributions, and saving as much as they can.